FSB Response to Covid Market Turmoil


On Nov. 17, FSB addressed issues from Covid March market turmoil.


  • FSB issued work programme to address risks from non-bank financial intermediation.
  • Published chair's letter and two reports to G20 leaders ahead of Nov. 2020 summit.
  • On same day, FSB issued report on policy actions taken to address Covid see, #90934.
  • Follows Fed Oct. 2020 Quarles on non-bank financial institution risks, see #88837.
  • Chair Letter on Reform Status
  • Letter stated FSB acted to address vulnerabilities in financial system exposed by Covid.
  • Has made progress on other topics, from cross-border payments to reforms of LIBOR.
  • Will require continued strong commitment and coordination at the international level.
  • Noted financial conditions has eased, but global economic outlook remained uncertain.
  • Financial stability risks raised, set out 3 responses to financial stability vulnerabilities.
  • Market Turmoil in Mar. 2020
  • Letter said market turmoil in Mar. 2020, manifested itself differently around the world.
  • Emerging market economies experienced severe strains in offshore US dollar funding.
  • Some advanced economies saw significant outflow from government bond investment.
  • FSB holistic review assessed initial stages of the Covid-19 event, as having exposed a number of common strengths and vulnerabilities across the global financial system.
  • Need Enhanced Vigilance
  • Covid shock revealed need for continued vigilance, and policy support to the markets.
  • Challenge posed by Covid not yet dissipated, remains persistent economic uncertainty.
  • Elevated stability risks call for continued vigilance, FSB is monitoring for vulnerabilities.
  • Protracted nature requires continued efforts to support resilience and ensure financing.
  • Covid crisis provided an opportunity to further assess financial stability risks, and to refine measures put in place after the 2008 global financial crisis, where appropriate.
  • Lessons help strengthen financial sector resilience to better prepare for future shocks.
  • Conducted Holistic Review
  • FSB issued review to analyze market upheaval in Mar. 2020, brought about by Covid.
  • Assessed market reaction to Covid and FSB work on risks of non-bank intermediation.
  • Breadth and dynamics of economic shock, related liquidity stress in Mar. 2020, were unprecedented, caused fundamental repricing of risk, raised demand for safe assets.
  • Stress also led to large, persistent imbalances in demand for, and supply of, liquidity.
  • Cause of Liquidity Stress
  • Certain activities, mechanisms in financial system acted as mitigants of liquidity stress.
  • Central counterparties were resilient despite market turbulence, some investors in open-ended investment funds may have faced incentives to redeem, ahead of others.
  • Stronger bank capital and liquidity positions, that were built over the past decade, as a result of the post-crisis reforms, helped to prevent a sharper rise in counterparty risks.
  • Some banks unwilling or unable to deploy balance sheet capacity, in uncertain market.
  • Dealers faced difficulties absorbing large sales of assets in short-term funding markets.
  • Market dysfunction were exacerbated by substantial sales of US Treasuries, by some leveraged non-bank investors and foreign holders, but stated it is highly likely stress in financial system would have worsened significantly absent central bank intervention.
  • Action on Non-Banks
  • FSB concluded Mar. 2020 turmoil underscored need to strengthen non-bank financial intermediation (NBFI) resilience, set out NBFI work programme, focused on 3 areas.
  • Enhance understanding of systemic risks in NBFI and the financial system as a whole, including interactions between banks and non-banks, and spill-overs across-borders.
  • Also need to assess policies that can better address the systemic risks in NBFI sector.
  • Review adequacy of policy tools and the concept and desired level of resilience in NBFI.
  • Non-Bank Work Program
  • Issued work program on NBFI, coordinated and overseen by FSB for 2021 and beyond.
  • Policy proposals to enhance money market fund (MMF) resilience in 2021, report G-20.
  • Examine liquidity risk in open-ended funds (OEFs), redemption pressures, in 2021-22.
  • Review margining process in centrally cleared and uncleared derivatives markets, and liquidity management preparedness of market participants to meet margin calls, 2021.
  • Liquidity, structure and resilience of core bond market, examine working under stress, role of leveraged investor and factors limiting dealer ability to intermediate, in 2021-2.
  • Analyze interconnectedness in NBFI, USD funding pressures and fund outflows, 2021.
  • Examine policies to address systemic risks in NBFI, adequacy of current tools, in 2022.
  • Report to G-20 on Covid and Policy
  • FSB issued report updating G20 leaders on impact of Covid-19 on the financial system.
  • Considered the financial stability impact, and policy responses to the Covid-19 event.
  • Stated global financial conditions continued to ease since G20 meeting in Jul. 2020.
  • Attributed to decisive policy action earlier this year, but risks to global financial stability remain elevated, financial conditions vulnerable to sharp shifts in investor sentiment.
  • Noted that volatility in equity prices has increased recently against the backdrop of a second wave of the pandemic and further containment measures in some regions.
  • Deteriorating credit quality of non-financial borrowers poses risks to financial sector.
  • Pandemic intensification, resulting necessary government containment measures, and greater uncertainty about its duration, increased vulnerabilities in non-financial sector.
  • Impact on Banks
  • Vulnerabilities may increasingly affect banks, and supply of financing to real economy.
  • Bank capital ratios have held up so far, and have allowed banks to continue lending.
  • But rising loan losses and worse asset quality, may see banks tighten credit conditions.
  • In addition, further credit ratings downgrades, could put bond markets under pressure.
  • Risk that a deterioration in corporate sector health, could lead to further downgrades.
  • Going Forward
  • Evolving Covid-19 pandemic, associated economic uncertainties need continued efforts to support financial resilience, ensure sustained flow of financing to the real economy.
  • It is critical to address potential obstacles to the use of bank capital and liquidity buffers to absorb losses and support lending, while avoiding harmful deleveraging.
  • Use of analytical tools, such as stress testing, is important to inform assessment of potential solvency risks on financial stability and adjustments in policy responses.
  • Authorities’ communication of expectations of future policy, at a time when conditions are changing fast and the outlook is uncertain, is important to support confidence.
  • Highlighted FSB Covid-19 principles which guide national responses to Covid-19.
  • Coordinated measures discouraged unilateral action, prevented market fragmentation.
  • Nov. 17, 2020 GE BaFin Response
  • On Nov. 17, 2020, GE BaFin noted FSB's workplan focus on specific risks that may have exacerbated the shock, on understanding risk in NBFI sector, including links between banks, non-banks, and measures to reduce systemic risks in the NBFI sector.

Regulators FSB; G-20
Entity Types B/D; Bank; Corp; HF; IA; Ins; Inv Co
Reference Rp, Lt, PR 11/17/2020; COVID-19
Functions Financial; Operations; Reporting; Risk; Treasury
Countries Global Regulator
Products Banking; Corporate; Equity; Fund Mgt; Hedge Funds; Loan; MMF: Money Market Fund; Mutual Funds; Securities
Regions Global
Rule Type Guidance
Rule Date 11/17/2020
Effective Date 11/17/2020
Rule Id 90936
Linked to Rule :90934
Reg. Last Update 11/17/2020
Report Section International

Last substantive update on 11/19/2020